07 January 2011

Undisclosed Risk: the cost of freedom is loss

You won’t hear the provincial Conservatives talking too much about an April 2009 deal to sell surplus power from Churchill falls to Emera in New York.

They talked about it a lot when they cut the deal. 

Back then, Danny Williams said the five year contract proved that Labrador hydro power wasn’t isolated any more.  Nalcor wheels Churchill falls power through Quebec to markets in the Untied States.  Nalcor pays Hydro-Quebec a fee for wheeling the power.

And Danny Williams was absolutely right.  Labrador hydro power isn’t isolated.  if Nalcor had customers for Labrador hydro, they could send the power through Quebec tomorrow.

The reason Nalcor isn’t developing the Lower Churchill and shipping the power through Quebec is because there is no market for the power.  Everything else you’ve may have heard from provincial Conservatives in Newfoundland and Labrador and from the local media about a big Quebec conspiracy to block Nalcor is – in a word – crap.

You can see that the Conservatives wouldn’t want to talk about the Wheeling Deal.  it proves that their more recent line, the one that supposedly justifies the Muskrat falls project is – in a word – crap.

Turns out there may be another reason why they aren’t talking about it.

Danny Dumaresque, a former director of Newfoundland and Labrador Hydro, issued a news release on Wednesday claiming that Nalcor is losing money on the Wheeler Deal. The story got decent media coverage across Newfoundland and Labrador and even made it onto the Radio Canada website. There’s also a short story about 20 minutes into the CBC’s Here and Now broadcast on January 5, 2010 and on NTV News from the same date.

Dumaresque looked at the Nalcor annual report and calculated that the company lost money on the deal compared to the previous deal to sell the power to Hydro-Quebec:

Over the past 18 months I have been told various figures of costs and revenue but because these figures were much different than the previous contract with Hydro Quebec, I was reluctant to cite them. However, today I can confirm that this province has lost $15 million in the last 9 months of 2009 under this ‘historic arrangement’ than we would have received from the contract with Hydro Quebec, a reduction of 40 percent.

My information is that results have not been any better in 2010 and up to $20 million will be lost. Therefore, in less than two short years we have lost $35 million of precious taxpayer’s money and the potential to lose up to $100 million over the life of a 5 year agreement which we had with Hydro Quebec!

In addition to this loss of revenue to the province I am also able to confirm that NALCOR has paid nearly $34 million to the Government of Quebec since this deal was done and $7 million to Emera Energy of Nova Scotia. [bold in original]

In the media interviews, natural resources minister Shawn Skinner doesn’t dispute the losses.  In fact he admits that under the deal, Nalcor would lose money when electricity prices are low but it could make them back if prices are high.  Even he uses the line with CBC to the effect that losing money is the price of freedom.  When a politician has to use complete bullshit like that you know he’s been caught out.

There are three things to note from this.

First of all, this is pretty much what you might expect from the deal.  It was clear at the time Nalcor inked the deal that – based on the numbers they released – the deal would only deliver about the same price per kilowatt hour to Nalcor that they were getting under the old fixed-price deal with Hydro-Quebec.  Sure electricity retails for 20-odd cents per kilowatt hour in New York city.  But by the time you take off the wheeling charges to Hydro-Quebec and all the other middlemen, and allow for Emera’s cut, the net for Nalcor was 3.5 to 4.0 cents per kilowatt hour.

As it turned out, electricity prices dropped in the United States what with the 2008 recession and all. They are so low that American producers can sell electricity produced by natural gas from the United States across the border into New Brunswick.  And as it stands right now, prices are going to stay down for the duration of this first contract. 

Newfoundland and Labrador Hydro considered wheeling the power in 1998 but figured out exactly what has happened.  They opted for selling power for the best return as opposed to going the Danny Williams route and losing money.  Pure business genius at work there signing a deal that only works if prices stay high or keep going up.

Second of all, you have to appreciate that this is exactly the same sort of financial wizardry that underpins the Muskrat Falls deal. 

In order for Danny’s retirement plan to work and for the taxpayers of Newfoundland and Labrador not to take it in the derriere, oil prices have to double from their current level within the next decade and keep going from there.

If anything else happens, then the taxpayers get jammed up badly.  The reason is simple:  Nalcor is building the whole project based on the only guaranteed sale being for power inside Newfoundland.  They can sell power to other provinces or to the United States and if the prices fall far short of the cost of production, then the taxpayers of this province will cover the loss through their electricity rates.  That’s exactly what provincial laws – amended since 2006 – require.

Notice that none of the other players involved lose anything.  Emera gets cash no matter what.  For $1.2 billion they get 35 years of essentially free power to sell to Nova Scotia.  They can sell other power for less than the cost of production and even at the end of the 35 years they will pay less for the power than it cost to produce it in 2017 when the first power is supposed to flow.

It’s the same as the Wheeler Deal.  Hydro-Quebec gets its fees for carrying the juice to the border.  Emera gets its fees and commissions.  The only people who come up short on the deal are the taxpayers of this province who – one way or another – have to cover Nalcor’s losses.

Not bad, eh?

Now the thing is that nobody mentioned this at the time Danny Williams announced the deal in April 2009. Danny never said taxpayers could lose money at all. He never even vaguely hinted at it.  In fact, while he acknowledged prices at the time were low, Nalcor boss Ed Martin said that

[b]ased on current electricity prices, Newfoundland and Labrador could earn about $40 million to $80 million in profits annually….

That’s the third thing and it is the biggest thing of all:  it’s called undisclosed risk. And in business circles, failure to disclose significant risk to investors -  or the de facto owners in this case - is a pretty big deal.  It goes straight to the trust that the ordinary people of Newfoundland and Labrador have placed in these politicians who are now acknowledging, in effect, that there are very important things about these deals that they haven’t bothered to tell people about.

It makes you wonder what other little secrets, what other little time bombs there are ticking away.

What other undisclosed risks are the people of the province facing that they didn’t face before 2003?

- srbp -